Masala bonds out of total corp bond cap of Rs 2.4 lakh crore

Move will allow foreign investors, who've almost exhausted their limits, to ramp up investments in Indian debt paper without actually increasing the cap

The Reserve Bank of India (RBI) on Friday increased the corporate bond investment limit for foreign investors by taking off rupee denominated bonds, or Masala bonds, from the ambit of total investment limit. The outstanding Masala bonds of Rs 44,000 crore would now be allocated for re-investment in the corporate bond segment in two quarters, said the central bank in a statement. 

Currently, the limit for investment by foreign portfolio investors (FPIs) in corporate bonds is Rs 2,44,323 crore, including in masala bonds. The FPIs have exhausted 99.07 per cent of their corporate bond investment limit. With US yields rising, India’s debt market has also come under some pressure. 

The central bank said the space vacated by the masala bonds would be released for FPI investment over the next two quarters — Rs 27,000 crore in the third quarter, and Rs 17,001 crore in the fourth quarter. Of the total amount, Rs 9,500 crore in each quarter will be available only for investment in the infrastructure sector by long-term FPIs such as sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks, the RBI notification said.

According to Karthik Srinivasan, group head - Financial Sector Ratings, ICRA Ltd, "The revised limit is applicable from October 3, 2017 and is expected to result in higher FPI flows and likely compression in corporate bond spreads, given the above change.”